With little cash coming in the door and debt accumulating, startups do not have the means to pay big salaries to attract top tier talent and add to their headcount. That is why startups should consider adopting a stock incentive plan to compensate and motivate employees, contractors, and advisers with stock instead of salaries. Although it may mean “working for free” for now, talented employees will be enticed by the idea of owning a piece of the startup because it could mean a big pay off later when, and if, the startup has a successful initial public offering or is acquired. Although the employee, contractor, or adviser may feel like they are “working for free,” the IRS disagrees.
When discussing intellectual property (IP) with founders, I get two very different questions from founders, and both questions have the same answer. The first question is, “This IP is my baby, can I keep it instead of giving it to the company?” The second is, “Can’t we worry about IP later?”
The answer to both questions is always “no” if you aspire to obtain venture capital investment to grow your company. Venture funds will take a hard pass on any startup that does not own or has not taken steps to protect its IP.